Multifamily borrowers are again turning to institutional lenders, as Fannie Mae and Freddie Mac raise their prices and many banks scale back their balance-sheet lending efforts.

But whether these portfolio lenders can take advantage of the reduced competitive landscape remains to be seen.

Before the emergence of conduit lenders, institutional lenders such as life insurance companies and pension funds dominated the multifamily debt industry. With the conduit market now all but shut down, many portfolio lenders saw a sharp surge in volume through the first half of the year.

The new business, combined with fewer unanticipated prepayments of debt in their portfolio, has forced many portfolio lenders to rein in their appetite for commercial real estate.

“There's a lot of cherry-picking going on now, and there's a limited amount of life company capital remaining, so many companies have pushed up their overall yield requirements,” said Dana Brome, senior managing director at Holliday Fenoglio Fowler, L.P.'s (HFF) Hartford, Conn., office. “Most of them have a very finite amount of capital left.”

Spreads on debt from life insurance companies have been on average about 15 to 20 basis points over the government-sponsored enterprises (GSEs) this year. But as Fannie Mae and Freddie Mac continue to raise their spreads, the pricing advantage they had over institutional lenders for most of the year has begun to neutralize.

Life insurance companies were quoting minimum lender spreads of 280 to 320 basis points for standard 10-year debt in mid-August, a rise of about 30 basis points since May. But for the best deals in the strongest markets, many institutions are willing to get more aggressive in pricing and underwriting terms.

“We've seen the insurance companies widen their spreads,” said Phil Melton, a senior vice president with Grandbridge Real Estate Capital. “They're getting aggressive on the deals they really want, but their standards across the boards are up, and part of that is because they've got such a full bucket from the beginning of the year.”

Some institutional lenders have offered better rates than the GSEs on low-leverage short-term executions this year. For instance, HFF arranged a $21 million five-year fixed-rate loan through Hartford Investment Management Co. earlier this year for an apartment complex in Naperville, Ill., a suburb of Chicago.

The loan had a 4.91 percent interest rate, and the transaction was ratelocked in the spring, before institutional lender spreads began to climb. Even though the loan only went up to 55 percent of loan-to-value (LTV), that same rate couldn't be locked today, according to Brome.

Life insurance companies continue to favor low-leverage loans, and many wouldn't go past 60 percent LTV in mid-August. “The real name of the game right now is leverage; thelower your leverage, the more you can expand who you're speaking with,” said Brome. “As you go further up with leverage, you get limited to Freddie and Fannie.”

Prudential looking to expand

Not every institutional lender is cutting back. Last year, Prudential's institutional lending arm put out a record amount of multifamily debt, about $1.2 billion, and the company said it's on track to repeat that performance this year. The company favors multifamily as an asset class, as about 33 percent of the originations in its institutional portfolio are multifamily-related.

The company hopes to capitalize on a reduced competitive landscape in the second half. “We see this market as providing the best lending environment that we've seen in 15 plus years,” said David Durning, Prudential's managing director of originations. “We did more loans during the first half of this year than we did in the first half of last year, and have the appetite to continue that through the end of the year.”

Prudential sees particular opportunity in construction lending. The company offers fixed- and floatingrate construction-to-permanent executions, as well as rehabilitation-topermanent loans, and it will also selectively issue stand-alone construction loans from its balance sheet.

“At the end of the second quarter, we saw banks pull back on their construction loans,” said Durning. “For the balance of the year, that will have more of an impact, and that may be where there's opportunities for portfolio lenders.”

The company also sees increased opportunity in providing shorterterm fixed-rate loans. While the agencies enjoyed a pricing advantage for much of the year, “that's probably not true today. The agency spreads have come up to where everybody else was,” said Durning. “A five-year loan from an institution might be more competitive than an agency loan today.”

New programs

Prudential's appetite and aggressiveness is a little unusual compared to its life insurance company brethren, many of which are issuing fewer commercial loans as the year progresses. But other institutional lenders are cautiously stepping forward to take advantage of the current market.

Heitman, which manages equity investments for institutional investors, opened its first debt operation earlier this year. The program focuses on short-term floating-rate debt for new construction or acquisition- rehabilitation deals with an average size of about $20 million.

Another recent entrant to the development debt market is Perseus Realty Partners. Historically a jointventure equity, mezzanine, and preferred equity provider, Perseus opened its first debt program in July focusing on new construction, acquisition- rehab deals, and recapitalizations.

In the past, the company would place debt with some of its investors, large banks like Wachovia, Mass Mutual, and Wells Fargo.

The company saw an opportunity in financing stalled projects victimized by the market's lack of liquidity. “We saw the market was getting increasingly more difficult to finance, especially new construction,” said Paul Dougherty, president of Perseus Realty Capital. “We are interested in doing a lot of multifamily, and right now, we are allocating as much capital as possible to apartments.”

The company's new participating loan program offers up to 95 percent loan-to-cost financing through both equity and debt, so only developments seeking Perseus' equity could access the debt program.

The program targets middlemarket assets valued at between $20 million and $75 million, providing short-term financing of three to five years. The debt can be structured as either fixed or floating rate. Perseus is targeting the East and West coasts, with limited exposure in mid-country regions like Chicago and Dallas.

UBS features a similar execution, and Principal Financial recently rolled out a similar participating loan program.

Preferred asset class

For the standard high-leverage 10- year deal, most borrowers are finding success with the agencies, but shorter- term loans offered by institutional lenders are growing more competitive with the agencies. Many institutional lenders, including 40/86 Advisors, Inc., AIG, ING, John Hancock, and Ohio National, have continued to quote deals through August, brokers report.

Multifamily borrowers may have to search harder in the second half to find capital, but at least it can be found, often at relatively reasonable prices. Many institutional lenders view multifamily as a preferred asset class. The same can't be said for other types of commercial real estate, such as office and retail.

“The multifamily borrower won't find much sympathy from their brethren that specialize in other property types,” said Durning.